Oman took advantage of attractive interest rates and raised $6.5 billion in January, its biggest sale on record, to help bridge deficits. And Bahrain, the smallest of the GCC’s six nations, tapped the international bond markets for $3.6 billion in 2017. It may issue this year to help meet funding needs.

Junk-rated Oman and Bahrain have the weakest finances in the GCC and face making politically unpopular decisions such as freezing public sector employment and cut spending significantly, Bloomberg reported, adding that the countries have been slow to implement reforms compared with their richer neighbours such as Saudi Arabia and Abu Dhabi, which have slashed expenditure, rolled back some subsidies and introduced five per cent value added tax (VAT) on 1 January 2018.

Easy access to the bond market “is blunting the urgency for reforms, but they also have to take into account political considerations and the debate around the new social contracts they are trying to implement,” said John Sfakianakis, the director of economic research at Gulf Research centre in Riyadh according to Bloomberg. “The more they delay implementing steps to raise non-oil revenue, the more difficult it will become in an environment of rising interest rates.”

As oil prices more than halved in the two years through 2016, Oman’s budget deficit climbed to 21.6 per cent of gross domestic product, but the country remained hesitant to scale back on infrastructure projects already underway because the potential impact on the economy, the government said in its bond prospectus in January. It instead relied on borrowing to fund the deficit, which the International Monetary Fund (IMF) sees narrowing to 11.4 per cent this year.

According to the IMF Oman has more than doubled its external debt in the three years through 2017. Together with its sale in January, the sultanate raised $18 billion from the sale of dollar bonds since the start of 2016, data compiled by Bloomberg show.

The Sultanate has taken a number of steps to improve its finances, including: raising corporate tax to 15 per cent from 12 per cent; reducing tax exemptions; easing fuel, electricity subsidies; deferring non-essential projects; and imposing excise duties on certain products.

However, total expenditure in the 11 months through November 2017 is estimated to have climbed 8.5 per cent from the previous year to OMR 10.4 billion ($27 billion), according to the bond prospectus.

Selling debt has been critical to maintaining Bahrain’s reserves. The central bank’s foreign-currency holdings dropped to a 16-year low of $1.27 billion in July before recovering in September after it tapped the bond market for $3 billion. The nation last year asked Gulf allies for financial help, according to people with knowledge of the talks.

Bahrain implemented some measures to trim expenditure, mainly reducing subsidies and transfers, which lowered their contribution to total expenditure to about 25 per cent in 2017 from 29 per cent in 2014, S&P Global Ratings said in a December report.

While Bahrain has eased spending, imposed excise tax, and increased fuel prices, the changes have not been enough to stabilise its debt-to-GDP, Fitch said in a report this month after it downgraded Bahrain’s credit rating deeper into junk.

Some of the issues facing Bahrain include an unclear medium-term strategy to tackle high deficits and there is no clarity on a timeline towards the development of such a strategy, Fitch said. “The political environment, embedded social expectations and a lack of experience with taxation severely constrains the government from enacting a sharper fiscal adjustment.”

Bahrain has about $14 billion of outstanding dollar bonds, according to data compiled by Bloomberg, which has helped boost the government’s debt-to-GDP to 91 per cent last year, IMF estimates show. The fund sees it rising to 99 per cent this year and 107 per cent in 2019.

Its fiscal deficit this year is forecast at 11.9 per cent of GDP, and economic growth is set to ease to 1.7 per cent this year, the slowest pace since 1989, according to the IMF.

“Further material support from the GCC would be forthcoming in case of extreme political, financial, or fiscal instability, given Bahrain’s small size and strategic importance. The expectation of such support has supported Bahrain’s market access and US dollar peg despite extremely low foreign-exchange reserves,” Fitch concluded.